Let’s Break Up: Funimation and Crunchyroll Separate After Two Years

Yes, my Annieme-niacs, the time has finally come. Where were you when the great split happened?

I, myself, was attempting a re-watch of several of my favorite shows, when they all magically disappeared from my queue.

Just kidding: they were kidnapped.

Just kidding: they were capitalism-ed.

In addition to my creative and critical writing MA, I earned bachelor’s degrees in both creative writing and business marketing. Basically, I’m really interested in content and how it’s conveyed to its target audience.

Lemme tell you, kiddos: this is bad news. For everyone.

It’s commonly believed that Crunchyroll was the primary beneficiary of the deal, but to be honest, that’s just wrong. Perhaps wrong is too strong of a word. It’s misinformed and surface-level, with little focus on business analytics.

Let’s say you’re listening to your favorite song on Spotify, iTunes, or any other music platform. That song was made by an artist, was produced by a record label, and was then licensed and uploaded to a platform for your lovely earholes to enjoy some great tunage.

Crunchyroll, in this example, is Spotify, or the platform, and it is, for the most part, very good at what it sets out to do: deliver a wide range of anime (plus manga, store, news, etc.–but here we’re just focusing on anime) immediately after the Japanese broadcasts. What they sell is a service, not a product. Crunchyroll acts as a distribution channel for anime.

To contrast, Funimation is a producer, the record label. It focuses on finding promising artists and polishing them into sellable products. It has the capital to fund projects, and therefore it’ll also be in charge of deciding on voice actors, key animators, scheduling, and a lot of the key features that make it marketable.

The producer and the platform aren’t competitors; they’re difference links in the same distribution channel. The two companies perform entirely different roles, have different specialties and skill sets. Businesses tend not to do all of the roles in-house, because, frankly, it takes a lot of time, practice, and finances to learn how to execute these roles with any sort of excellence. To save those resources, they outsource.

Recently, however, there has been a business trend to cease outsourcing entirely. We see this with Netflix Originals: Netflix both produces and distributes exclusive content. While there has been some gems of shows, the rare beauties that tick all of the boxes, most of the works are largely underwhelming. They lack finesse and expertise, proving to be a waste of the reallocated resources.

Sony recently acquired Funimation, and after doing so, deemed the licensing agreement to be insufficient and unnecessary, despite having a partnership with Crunchyroll. They have, it seems, insisted on keeping all production chain items in-house. Clearly Sony believes they have enough clout to do so, but the concern is can they do it to the quality we’ve grown accustomed to and expect.

The answer is a no. A resounding and encompassing no.

Your girl did some research. I signed up for a FunimationNow account, and I’ve utlized multiple devices to access the content: mobile app, through the PlayStation 3, and in a regular browser on PC.

There were problems with product’s basic functions, as well as its form. On the PS3, Sony’s own device, there was severe skipping, including audio and sub lags, to the point where the subtitles would appear after the character had finished speaking. It’s difficult to tell who’s saying what at times, because they don’t differentiate their subs at all: it’s all the same. This, combined with the lag makes it extremely difficult to watch subbed.

Furthermore, the subs were similar to YouTube, featuring white lettering with a black highlight at a small font size.

I experienced the best playback on my PC, where there was zero lag. However, there was still a subbing problem. While the text was bigger and cheap highlighting removed, what remained was a white font which completely blended into any white space in the animation.*** UPDATE: The text has been updated to have a thin black line as seen in the below screenshot! Whoo-hoo! We’re living in the future

I’ve learned there’s a lot of white in anime, at least.

So if FunimationNow isn’t a good service, why use it and make your audience unhappy? Let’s get into the nuts ‘n’ bolts of our marketing theory!

Why the break up?

Otter Media/AT&T/Warner Media’s Acquisition of Crunchyroll

On December 2, 2013, The Chernin Group acquired a controlling interest, or majority stock share votes, in Crunchyroll. By April 22, 2014, AT&T and the Chernin Group created a joint venture to acquire, invest in, and launch over-the-top (OTT) video services, AKA Otter Media, which became Crunchy’s majority owner.

Otter Media later unveiled Ellation, a new umbrella company for its subscription-based video services including Crunchyroll in 2015. This is where VRV came into play in 2016, as well as the partnership between Crunchy and Funimation, and by August 2018, WarnerMedia acquired Otter Media.

So in short, there’s been a lot of changing hands, a lot of purse strings at play for Crunchy, too—something that was hidden behind the more intimidating Sony/Funimation acquisition.

Sony’s Acquisition of Funimation

Sony is no stranger to the tech field, and it’s continually diversifying both its products and services, and its target audiences and consumer pools. Currently, the company operates in three main facets: electronics, gaming and entertainment. As the parent of the largest music and video game console and publication businesses, as well as electronic manufacturer and player in the film industry, it’s no surprise it’s ranked 97th on the Fortune Global 500 list.

In July 2017, Sony acquired 95% majority stake of Funimation for about $143 million.

Rise in Anime Market

The overall anime market was valued at about $19 billion in 2017, an 8.1% increase from the previous year. This trend doesn’t look like it’s going to be stopping any time soon, and in fact, seems to be picking up speed:

It’s typical for market’s to ebb and flow, but the anime industry is growing at an exponential rate. In reference to the chart above, the values in the chart represent market value in units of 100 million yen.

Okay, so the market’s growing. That’s no surprise with the quality of shows that have been released in the last couple years, the ease of access via streaming services, and the social media culture which supports fandoms. The important part is why and how the market is growing; what factors are at play behind that rising $$$?

Foreign Sales Growth

Funimation’s CEO and President, Gen Fukunaga, emphasized that there were, in fact, negotiations in place to renew their contracts and licensing agreements. Their main disagreement was on international expansion, and when we note that foreign sales revenue has tripled in the past three years, it’s easy to see why. Yup, you heard me: tripled. This number doesn’t include foreign funded projects which premiered exclusively overseas, and it might also exclude revenue from mobile games or live events–think of the expos!!! In short, the actual number of foreign growth is much higher.

For 2017, the global market (demonstrated with the dotted line) grew 29.6%, while the domestic market, as shown by the solid line suffered a 5.5% decrease:

So, what was the problem with expanding into an ever growing market? As a distribution channel and platform, Crunchy has a lot of control in deciding who gets to see what and where. It’s part of the reason I had to take a break from watching One Piece while I was studying abroad in the UK. When I went home to the States for the holidays that year, I was able to catch up with an all-day binge. Region-blocking isn’t anything new. It’s pretty common nowadays, especially with digital media consumption. Through the old agreement, Funimation’s titles were blocked from certain regions and it’s clear why they would want those restrictions to be negotiated for a future deal.

“We did try to renew with [Crunchyroll], but there were some terms that they would not give on that we really had to have, to have a longer-term renewal with them. And they wouldn’t budge, and we couldn’t renew on those terms. So Sony had to make this tough decision: if they weren’t going to budge on those terms, then we just have to double down and decide if we’re going to go at it alone. And that’s what happened.”

-Gen Fukunaga

A Change in Focus

Funimation, under Sony’s new rule, is pulling away from its production-driven business. We’ve seen an influx in the past five years of high-quality anime entertainment. However, there’s been a decrease in both the number of works created and character goods. In 2017, there was a 16-title decrease from 356 to 340. We can speculate that Japanese anime production capacity has hit its max and it’s also a possibility that production companies (Funimation) aren’t funding as many works. The quality has been going up, yes, but with it so do production costs. Naofumi Itō, the Asatsu-DK content strategy director, noted how difficult it has become to achieve the benchmark of home video sales (20,000 units). These sales usually balance out the production costs. Now that people are taking to watching streams rather than buying the product directly, less series are hitting our screens.

As for character goods, revenue dropped 7.0% between 2017 ($4.62 billion) and 2010 ($5.54 billion). We’re talking things like Pop! figures and Nendoroids, here, along with any character-related goods produced directly by Funimation. That loss isn’t something to sneeze at. Sony looks to be focusing away from producing, since the products aren’t making any money, and trying to do something they’re just poor at and not equipped to handle.

FunimationNow & Hulu

Perhaps Sony has seen the faults in their service with FunimationNow, and its answer is their new partnership with Hulu, as Fukunaga explains here:

One of the benefits of that deal is that it doesn’t have some of the handcuffs that we couldn’t get around with Crunchyroll. Obviously, we could do this new deal that included no restrictions on global expansion.

But isn’t this just going to perpetuate the issue? Hulu’s not a great platform. It’s got a serious problem with advertisements. Honestly, wouldn’t it be better to have a genre-specific one like Crunchy? One that knows anime and understands the fanbase and market, rather than one that’s just exploring it for its capital growth?

[Hulu] have their own anime base and this will help us co-buy content, and bid for the bigger titles, They’ll help us get the mass exposure and we can get the hardcore anime fans on our platform. It was a good partnership in that sense and we can co-exist. And that’s why it works for us.

Hmmm. It’s also owned by Disney, which makes me question the sustainability of the deal as well in light of Disney’s goal to create their own exclusive streaming service.

Anything we’ve already done, we’re going to continue to release it on home video. We’re locked in together on the stuff we’ve worked on together. The question is ‘what’s going to happen to future titles, to future seasons?’ The answer to that is: it depends. The contract wording is a little bit nebulous, and we are going title by title and deciding what we are working on together.

Right now, we’re vetting through every title to decide what we’re working on together and what we’re not. Until both parties agree, we don’t know [how long it’ll be until fans know].

So, we’ve got zip. Nada.

Will our fave series be discontinued?: idk

Where can we watch our fave series?: idk

So I’m just supposed to buy up a whole bunch of subscriptions in order to watch shows that may never get produced?: yup.

Honestly, with not one but now two kitty mouths to feed, my budget has taken a huge hit. I don’t have the resources to support multiple streaming services, nor purchasing physical discs of series (other than my absolute faves). The otaku network usually doesn’t have a lot of capital. We’re not loaded; we’re poor.

Why did I sign up for Crunchy? Simple: I didn’t have the money to have multiple premium accounts with the various producers: Funimation, Viz, and the like; media was uploaded immediately, so I didn’t have to worry about spoilers, waiting for English subs or using unreliable translations from the Japanese originals; the site was easy to use; its community was welcoming and warm. Overall, there was a lot to love, and, admittedly, there still is. The company is taking the hit as best as they can, attempting to console us with a promise of better dubs. Unfortunately, I don’t watch dub except for a select few, all of which are produced by Funimation. Crunchyroll hasn’t released a statement since the split was finalized, and I’ll update this post when/if it appears.

So What Now?

Here’s what’s likely gonna happen: they’ll be an inital spike in revenue from people purchasing subscriptions, followed by an eventual drop once people realize how bad those services are. Before that drop, it’s likely they’ll be more companies selling and buying other companies. This is followed by more changes and more spikes and drops.

From a consumer standpoint, it’s killer. And as far as markets go, we’re a fairly inflexible audience. We don’t like change. These revenue spikes are superficial and unsustainable. Nobody benefits from this split. Good indie companies get swallowed up by the money-hungry big boys. What’s worse is they need the big boys in order to get necessary funding and exposure. Business marketing is a tricky balance and a difficult game of chess–it always has been– but the real problem is that these companies are beginning to disrespect their target audience: they’re not putting in the fundamental research and analytics. Or maybe they are, but they’re just not doing it with any real care, and that is a very big, very real problem for our market.